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spk01: At this time, I would like to welcome everyone to the Clean Water Paper Second Quarter 2024 earnings call conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Lohan Burian, investor relation. Please go ahead.
spk03: Thank you, Soeyn. Good afternoon and thank you for joining Clear Water Paper Second Quarter 2024 earnings conference call. Joining me on the call today are Arson Kich, president and chief executive officer, and Sherry Baker, senior vice president and chief financial officer. Financial results for the second quarter 2024 were released shortly after today's market close along with the filing of our 10Q. You will find a presentation of supplemental information, including a slide providing the company's current outlook posted on the investor relations page of our website at Clearwaterpaper.com. Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note slide two of our supplemental information covering forward-looking statements. Rather than rereading this slide, we're going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arson.
spk04: Thank you everyone for joining us and good afternoon. Let me start with a few comments regarding our recent strategic announcements. As we previously discussed, we believe that both of our businesses require scale to be able to grow and invest, especially given the capital-intensive nature of our industry. We took a big step in that direction in our paperboard business by acquiring the Augusta facility from Graphic Packaging. That acquisition closed on May 1st, and we're in the process of integrating the facility into our network and starting to capture synergies. We took another major step by announcing the agreement to sell our tissue business to Sopidil America, which is expected to close in the fourth quarter of this year, subject to satisfaction of customary closing conditions, including regulatory approval. We believe that these are transformational and strategic steps for Clearwater Paper. We're focused on strengthening our position as a premier, independent supplier of paperboard products to North American converters. The divestiture of our tissue business will allow us to strengthen our balance sheet and position us for future internal and external investments to grow and diversify our paperboard portfolio. We believe that these strategic moves will allow us to continue to grow our business and create long-term value for our shareholders. Let me summarize a few key deal points from the announced divestment. We agreed to sell our tissue business to Sopidil America for cash totaling $1.06 billion. We expect net proceeds from the sale to be approximately 850 million, which we intend to use to repay existing debt and meaningfully deliver our balance sheet. The transaction includes our tissue facilities in Shelby, North Carolina, Las Vegas, Nevada, Elwood, Illinois, and the tissue manufacturing facility at our Lewiston, Idaho site. As many of you know, our Lewiston site also houses a paperboard facility, including a pulp mill, two paper machines, and other assets that we are retaining. As part of the proposed transaction, we will be entering into a site sharing agreement with Sopidil in Lewiston. This will include a lease of the land and facilities and a services and use agreement. Sopidil will also hire our Lewiston tissue employees at Close. We believe that we have come to a good agreement that will allow both companies to operate effectively on the Lewiston site. We look forward to a strong partnership with Sopidil and Lewiston in the years to come. Through this transformation, we're building a paperboard system that supports the growth of converter customers across North America. As part of this growth, we will look at opportunities to expand our product offering, which may include additional paperboard products and substrates. We will evaluate internal investments in our assets and external opportunities that are a good strategic fit for our network. Our goal is to build on our position as a scale paperboard packaging supplier in North America, with a compelling product offering, outstanding service, and a consistent track record of value creation for our shareholders. The August acquisition and the expected sale of our tissue business are both significant and transformational transactions for our company. Accomplishing both over six month period is a momentous feat for our team. I'm pleased with the progress that we're making and excited about the next chapter of the Clearwater Paper Story. Let me now briefly turn to our second quarter highlights before Sherry dives into the details. We reported net sales of $586 million, which were up 12% from the second quarter of last year. This was primarily driven by incremental volume from the August acquisition. Adjusted EBITDA was 35 million, which was 36 million below the second quarter of last year, primarily driven by the impact from the planned major maintenance outage at our Lewiston facility. Let's continue with a few highlights from our paperboard business. These can be found on pages three and four of our supplementals. Net sales were up 23% versus last year. This was driven by a 46% increase in shipment volume, primarily due to the August acquisition, offset by a 14% decline in pricing, which is largely consistent with what has been reported previously by RECI. Adjusted EBITDA for the paperboard segment was at 11 million, which included 9 million in insurance recoveries tied to the weather event that impacted us in the first quarter of this year. The decrease in adjusted EBITDA versus the prior year was driven by the planned major maintenance outage in Lewiston with a negative impact of approximately 32 million for the quarter. The outage proved to be more challenging than we expected, and we're now anticipating total impact to be more than $40 million versus our original estimate of 30 to 35 million. Beginning in 2025, we will move all of our paperboard facilities to an annual outage schedule, which is a common practice in the industry. We believe that this will lead to smaller, more predictable, and more manageable maintenance outages and improve our overall operating performance over the course of the year. We'll provide additional information regarding our 2025 outage schedule early next year. Finally, let me provide you with some market insights. Based on the most recent AFNPA data, SBS industry shipments improved sequentially by about 1% between the first and second quarters of this year. Industry operating rates remain flat at around 84% as inventory levels dropped. While we're seeing a gradual recovery, it is proving to be slower than expected. Industry publications are forecasting a continued demand recovery into the second half of this year and into 2025. While recovery has been somewhat slow, we remain bullish on the long-term market fundamentals. We believe that paperboard is well positioned for growth given consumer preferences and overall sustainability trends. A bright spot in the market today is food service with solid and growing demand. Our backlogs have grown and we're becoming capacity constrained. As a result, we're implementing a previously announced price increase to our customers for these grades, including plate and cup stock. Let me now provide a brief overview of our quarter per tissue. This can be found on slides three and five. The tissue business continued to perform at an outstanding level. Second quarter revenues were flat compared to last year, 253 million with 4% volume growth offset by 3% lower cost index based contractual pricing. We continue to deliver strong operating performance that helped offset sequential increases in poll prices. Injusted EBITDA per tissue was 41 million in the second quarter with a margin of 16.4%. This is the fifth sequential quarter of margins above 15%. As we previously stated, we expect to maintain much of the margin improvement that we achieved in 2023 into 2024. I'm deeply appreciative of the work that our tissue team has done over the last several years to deliver sustained improvements in operating and financial performance. With that, let me turn the call to Sherry for additional details on our financial results.
spk02: Thank you, Arson. I'll begin on slides six and seven with a review of our income statement and segment results. In the second quarter, we had a consolidated net loss of 26 million or $1.55 per diluted share. Adjusted loss per share for the quarter was 51 cents per diluted share. As Arson mentioned, our adjusted EBITDA was at 35 million, driven by strong results in tissue and insurance recovery from the weather event in Q1 and contributions from the Augusta acquisition. This was offset by the planned Lewiston major maintenance outage and lower paperboard pricing. Paperboard delivered 11 million of adjusted EBITDA while tissue delivered 41 million. As a reminder, our guidance range was 23 to 33 million, which excluded contribution from Augusta. Moving to slide eight, let's review our year over year performance in paperboard. Lower pricing had a nearly $26 million impact. As we previously discussed, this is consistent with publicly reported industry-wide trends. Partly offsetting the pricing decrease was higher sales volume, primarily driven by the Augusta acquisition and a modest recovery in demand. The planned major maintenance outage had approximately a $32 million impact in the quarter, which is reflected in lower production and higher maintenance costs. This was partly offset by a $9 million insurance recovery from the severe weather event that we experienced in the first quarter. Moving to slide nine, let's review our year over year performance in tissue. As Arson mentioned, pricing was slightly lower, driven by cost index-based contractual pricing adjustments and a higher mix of lower-priced conventional products. This was more than offset by higher shipments and lower costs. Our utilization rates remained high and overall operating performance was very strong. Pulp pricing in the second quarter was lower than the second quarter of last year, but higher sequentially versus the first quarter. We are expecting pulp to be a headwind in the third and fourth quarters of this year, but we are confident that we can maintain much of the margin improvement achieved in 2023. Industry publications indicate that pulp prices have peaked and may start easing in the coming quarters with improved supply and demand dynamics. Turning to our capital structure on slide 10, we ended the second quarter with liquidity totaling $224 million and a -to-adjusted EBITDA leverage ratio of 3.58 times. As Arson mentioned, the sale of our tissue business is expected to generate net proceeds of approximately $850 million, which will allow us to significantly de-leverage our balance sheet. We are evaluating our view on the appropriate leverage target for a standalone paperboard business in a higher interest rate environment. We previously stated that our leverage target was 2.5 times across the cycle, but we now believe that we will need to operate with a lower leverage ratio. We will discuss this further in upcoming earnings calls as we complete the sale of our tissue business. We have a proven track record of generating free cash flows and paying down debt. This remains our focus in the near term, as we believe that a strong balance sheet is needed to enable us to take advantage of strategic opportunities in the future. We also repurchased approximately $3 million of our stock during the quarter as part of our ongoing efforts to offset dilution from employee equity grants. Lastly, let's turn to our outlook for the third quarter and full year 2024 on slide 11. As Arson mentioned, we are anticipating a continued recovery in paperboard demand in the third quarter, higher production volumes, and a lower outage cost impact. We expect tissue performance to remain strong with some impact from higher pulp prices. With all those components, we believe that third quarter adjusted EBITDA will be in the range of 58 to 68 million. Please note that our third quarter guidance assumes that we will continue to operate the tissue business for the entire quarter. Full year 2024 operational assumptions now account for Augusta from May 1st through the end of the year. This includes higher volumes, synergies, and a major maintenance outage in Augusta in the fourth quarter. Full year 2024 assumptions also include a higher outage cost that we experienced in Lewiston during the second and third quarters. Please note that our full year assumptions do not include the impact of the tissue divestiture. Other 2024 assumptions have also been updated with the Augusta acquisition. This includes higher cash interest expense due to additional debt, higher depreciation expense, and higher cash capex. Augusta cash capex is expected to be $25 to $30 million from May 1st to December 31st. This includes the planned completion of an environmental compliance project at the mill, which was known to us during the acquisition. We previously stated that we expect ongoing repair and maintenance capex to be in the range of 60 to 70 million, excluding large projects. This included our two legacy paperboard mills and our tissue business. With the Augusta acquisition and the planned divestiture of tissue, we now expect our ongoing maintenance capex to be in the 70 to 80 million range, excluding large maintenance and strategic capital projects. With that, let me turn the call back to Arson.
spk04: Thanks, Sherry. The first half of 2024 has proven to be transformational for Clearwater Paper, and we couldn't be more excited about the future. Looking ahead, our priorities for the balance of 2024 include driving strong operational performance, executing the divestiture of our tissue business, and continuing the integration of the Augusta acquisition. I would like to thank our people for their continued focus on safety, strong operating performance, and servicing our customers. This time of transformational change can be challenging, but we're fully committed to supporting all of you as we open this next chapter of the Clearwater Paper story. With that, we will end our prepared remarks and take your questions.
spk01: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening by a loudspeaker on your phone, or on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Matthew MacCuller with RBC Capital Markets. Please go ahead.
spk05: Thanks very much. Good afternoon, Arson and Sherry. Thanks for taking my questions. First, I'd like to ask if you could provide a little bit of the consumer product scale. I think you've noted that you wanna grow and diversify your paperboard product portfolio. I think your balance sheet should be in a pretty reasonable range, although it sounds like you wanna bring that leverage target down a bit. But how should we think about how you'll evaluate your options when it comes to growth going forward?
spk04: I think you gotta start with what we're trying to do, which is to build that premier independent supplier paperboard packaging to converters in North America. Right now we are providing SPS. These converters use other substrates and other products. So we will look at opportunities, both internal and external, to have a more complete offering to our converters, whether it's lightweight products, other substrates, different coatings, and so on. We wanna make sure that we're providing all the products that our customers need to succeed and win in the market. So it will really depend on what that product strategy is and what opportunities we have available.
spk05: Would it be fair to think that you'd prefer to grow into other substrates as opposed to continuing to grow in SPS?
spk04: Our customers purchase a variety of substrates and products. So we're part of their answer today. We'd like to be a bigger part of their answer in the future. An offer, have a more complete offering. We have outstanding SPS assets right now. We have three assets that are well positioned across the country. I think we were able to offer SPS to our customers today and that we're pretty happy with our assets. So we'll be looking at other products and other substrates in the future.
spk05: Okay, thanks very much for that. Next is turning to maintenance. You completed the major plan maintenance at Lewiston Q2. I think you mentioned it was a bit more challenging than you expected. With that, were there any findings through that maintenance process that would have implications for capex levels over the next few years?
spk04: No, we discovered a few things during the outage that we addressed that was part of the cost equation. Frankly, we had operational challenges ramping the pulp mill after the outage. We're still addressing that as we speak. We're still ramping and working through those issues. But no, nothing that comes to mind that would materially change our outlook on capital in the future.
spk05: Okay, thanks. And I just wanna make sure, excuse me, I understood the comments around $40 million correctly. Did I understand that it was a $32 million impact to the quarter and then you're expecting that incremental eight million to be specific to Q3?
spk04: I think what we said is it's greater than $40 million impact here in Q3. We are still in the process of ramping the mill. So the final cost is yet to be determined, but the whole thing will be north of $40 million. We've done our best to incorporate the total outage cost into the Q3 guidance. So that's in there. But if something changes materially, we'll update you after Q3.
spk05: Okay, thanks for that. Maybe just sticking with the maintenance item. It sounds like you're planning to go to annual maintenance cycles. You're gonna be ready to talk about that a bit more at the start of 2025. I mean, is it a fair placeholder to think of, you know, your downtime next year is being key to it, Lutus and again in Q4 at Augusta, or what should our expectations, I guess, be around those cycles as we wait for the detail? Yeah,
spk04: we'll work through those. It really depends on, a lot of it depends on our ability to get contractors in place and also weather at these locations. But it's probably a fair assumption that we would look to do something similar as we did this year, although we will finalize that here in the coming quarters.
spk05: Okay, thanks. And then just some of the changes in the business. Now that you've acquired Augusta and that the Stishy sales should close by year end, how should we think about where you end up in 2025 in terms of a run rates corporate expense?
spk04: Yeah, it's a good question.
spk02: Yeah, so Matt, I think what we're gonna be doing is, is we're gonna be looking at this really from, I'll call it a run rate of what we typically run, which is in the call it six to six and a half percent of sales from an SG&A perspective. So as we're moving forward, we will continue to try and right size those expenses and we'll update you in the coming quarters as we continue to evaluate that cost structure.
spk05: Okay, great. That's all from me, I'll turn it back, thank you.
spk01: Ladies and gentlemen, that concludes today's call. Thank you all for joining, you may now disconnect.
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